02056cam a22002657 4500001000600000003000500006005001700011008004100028100001900069245011300088260006600201490004100267500001800308520094100326530006101267538007201328538003601400690006501436690007701501700002101578710004201599830007601641856003701717856003601754w8721NBER20150331182545.0150331s2002 mau||||fs|||| 000 0 eng d1 aParrado, Eric.10aOptimal Interest Rate Policy in a Small Open Economyh[electronic resource] /cEric Parrado, Andres Velasco. aCambridge, Mass.bNational Bureau of Economic Researchc2002.1 aNBER working paper seriesvno. w8721 aJanuary 2002.3 aUsing an optimizing model we derive the optimal monetary and exchange rate policy for a small stochastic open economy with imperfect competition and short run price rigidity. The optimal monetary policy has an exact closed-form solution and is obtained using the utility function of the representative home agent as welfare criterion. The optimal policy depends on the source of stochastic disturbances affecting the economy, much as in the literature pioneered by Poole (1970). Optimal monetary policy reacts to domestic and foreign disturbances. If the intertemporal elasticity of substitution in consumption is less than one, as is likely to be the case empirically, the optimal exchange rate policy implies a dirty float: interest rate shocks from abroad are met partially by adjusting home interest rates, and partially by allowing the exchange rate to move. This optimal pattern may help rationalize the observed fear of floating. aHardcopy version available to institutional subscribers. aSystem requirements: Adobe [Acrobat] Reader required for PDF files. aMode of access: World Wide Web. 7aE52 - Monetary Policy2Journal of Economic Literature class. 7aF41 - Open Economy Macroeconomics2Journal of Economic Literature class.1 aVelasco, Andres.2 aNational Bureau of Economic Research. 0aWorking Paper Series (National Bureau of Economic Research)vno. w8721.4 uhttp://www.nber.org/papers/w872141uhttp://dx.doi.org/10.3386/w8721